Faced with coming climate risks, regulators’ expectations of corporates have evolved from issuing disclosures to enacting transition plans.
Two reports released in the previous week — one involving the Singapore Exchange S68 Regulation (SGX RegCo) and the other by the Monetary Authority of Singapore (MAS) — explore this nascent but crucial area.
Companies, including those listed on SGX, must come up with “comprehensive” transition plans to show how they intend to reduce emissions, energy consumption and water usage; as well as to address the challenges and opportunities that lie ahead, reads the Sustainability Reporting Review 2023, the latest edition of a biennial study conducted by SGX RegCo and the Centre for Governance and Sustainability (CGS).
The study found that 65 out of 535 listed issuers have disclosed “reasonably detailed” climate transition plans. The real estate sector was most progressive on this front, making up 28 issuers among the 65, while 14 came from the industrials sector and seven from consumer non-cyclicals.
That said, the study highlighted two problem areas among the published transition plans: the lack of accountability without board oversight and missing targets.
An effective transition plan requires board involvement and a “clearly defined” governance mechanism to ensure accountability, reads the report. “This would include setting targets for management and monitoring their progress. While 40 issuers with a transition plan said that their boards were involved in the planning for climate change, only nine issuers provided detailed terms of reference.”
Singapore has set clear targets to reach net zero by 2050, but SGX-listed issuers have yet to move in tandem. “There is plenty of room for improvement,” reads the report.
Out of the 59 issuers that have disclosed targets backed by climate science in their transition plans, only 34 issuers set “quantitative and time-based” targets that would allow investors and customers to better track their progress or verify if the targets are in line with climate science, say the authors.
OCBC, ComfortDelGro C52 as case studies
The report spotlights two listed issuers for their transition plans. According to the authors, Oversea-Chinese Banking Corporation Limited (OCBC) has a “comprehensive” plan that spells out the risks affecting its business, explains how the board and senior management are addressing climate challenges and provides a “range of targets” at the operational level and in the composition of its loan portfolio.
The bank became a signatory to the United Nations-convened Net-Zero Banking Alliance in October 2022. In May, OCBC unveiled decarbonisation targets backed by climate science for six of the sectors it lends to: power, oil and gas, real estate, steel, aviation and shipping. OCBC has committed to achieve net-zero financed emissions by 2050 and the six sectors account for 42% of its corporate and commercial banking loan portfolio.
On governance, OCBC’s Sustainability Working Group meets regularly to discuss the latest ESG trends and propose strategies to deal with the challenges ahead, reads the report. “OCBC will then validate these recommendations with the help of stakeholders and external consultants before presenting them to the board for approval.”
Meanwhile, OCBC’s Board Sustainability Committee ensures strong board oversight over ESG issues, while a Sustainability Council chaired by the group CEO keeps track of initiatives.
Meanwhile, ComfortDelGro has pledged significant cuts in its emissions and aims to achieve net-zero emissions by 2050 in line with the Paris Agreement. Its plans include switching its fleet of cars and buses to vehicles that run on cleaner energy.
ComfortDelGro, which provides land transport services in several countries including Singapore, the UK, Ireland, Australia and China, is the first mobility operator in Southeast Asia to commit to and have its decarbonisation plan approved by the Science Based Targets initiative (SBTi).
The SBTi is an international partnership between CDP, formerly known as the Carbon Disclosure Project; the United Nations Global Compact (UNGC); World Resources Institute (WRI); and the World Wide Fund for Nature (WWF).
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The authors praise ComfortDelGro for publishing a “long list of climate-related targets” with “specific target dates”. The targets include achieving a 54.6% reduction in absolute Scope 1 and 2 emissions from operations, and a 61.2% reduction in absolute Scope 3 emissions from fuel and energy-related activities by 2032.
“Unlike many SGX-listed issuers, ComfortDelGro provides information about missed targets and cases where it had fallen short of the standards it aspires to,” adds the authors. “This is commendable as it paints a more accurate and balanced picture of ComfortDelGro sustainability performance.”
Transition risks for banks, insurers
MAS selects a few topical areas to feature in its annual Financial Stability Review. Following last year’s special feature on climate-related physical risks to financial institutions (FIs), one of three special features this year assesses the impact of climate transition risk on the financial system.
According to MAS’s analysis of FIs’ end-2022 credit and market exposures, local banks could face annualised credit costs of between 6.0% and 14.2% of their FY2022 net profits between 2023 and 2030.
Looking at banks’ credit portfolios, MAS’s analysis found that 27.6% of their total credit exposures are to counterparties in climate policy relevant sectors (CPRS). Meanwhile, in banks’ market portfolios, 5.1% of bond exposures and 54.1% of equity exposures are to CPRS.
The CPRS encompasses 27 sectors, including coal, gas, oil, cement, waste, building and construction and forestry, among others.
For insurers’ investment portfolios, 29.3% of their total bond exposures are to CPRS, which amount to 67.3% of their non-financial corporate bond exposures, while 26.6% of their total equity exposures are to CPRS.
The building and construction sector is the single largest contributor to banks’ projected credit losses. That said, the sector is projected to experience relatively mild credit deterioration under MAS’s projected scenarios.
In addition, MAS conducted a “deep dive” into individual FIs’ portfolios to better understand the distribution of risks across the banking and insurance sectors.
According to MAS’s findings, transition risk profiles are largely similar across FIs. For banks, credit cost estimates range from 0.37% to 4.6%. Similarly, there is heterogeneity in market loss estimates across banks, ranging from 0.02% to 3.6% (Chart S1.5), and across insurers, ranging from 0.31% to 8.4% (Chart S1.6).
Depending on the sectoral composition of their portfolios, the impact of transition risk on individual FIs can differ significantly, says MAS. “Banks and insurers with the largest increase in credit costs and market losses are relatively more exposed to transition-vulnerable sectors, such as fossil fuels, in particular the coal and oil and gas subsectors.”
